January 18, 2012
Column | fastlane

What to look for in a freight payment firm

Companies can save big money by using a freight bill audit and payment firm. But you have to pick the right partner.

By Clifford F. Lynch

During the past year, there seems to have been a resurgence in the outsourcing of freight bill auditing and payment responsibilities. For instance, 35 percent of the North American respondents to the "2012 Third-Party Logistics Study" conducted by Penn State and CapGemini said they outsource those activities. And while the percentage is much lower in Europe and Asia, interest in these regions seems to be increasing as well.

Although the outsourcing of any logistics function merits thorough due diligence, extra effort should go into the selection of a freight bill payment (FBP) provider, given the financial sensitivity and amount of money involved. But if it's so sensitive, why do it in the first place? There are several good reasons.

For starters, there's the potential for big cost savings. It can cost a large corporation anywhere from $10 to $50 in fully allocated costs to pay a single freight bill. When a competent FBP company pays the same bills, the cost to the client will be about 5 to 10 percent of the internal expense. Add to that another 2 to 5 percent saved through a reduction in incorrect and duplicate freight bills, and the savings to the client can be significant.

The real value, however, is added through the business intelligence generated by the provider. The technology used by most FBP companies is superior to that of many of their clients, which often translates to enhanced monitoring and analytical capabilities. Other benefits include report generation, visibility to freight bills, and improved data integrity.

But all this raises the question of how to select the right FBP provider. Although each client's needs will be unique, there are certain basic criteria all companies should consider when choosing a partner. They include the following:

Financial stability. The most important selection criterion will be financial stability. Find out how long the provider has been in business and whether it has sufficient resources to survive economic downturns. Does it pay carriers promptly? What are its investment policies? What type of fiduciary responsibility and protection are provided?

Business experience. How much experience does the candidate have? How many bills does it pay annually, and for whom?

Commitment to technology. Does the provider have the technology necessary to take advantage of its own critical mass and provide the output you require? Does it have the flexibility to accommodate each client's unique needs as they change over time?

Personnel depth and strength. Remember, you're not just purchasing services; you're buying expertise. Check out the management team as well as the audit staff. Does the provider have enough people to audit thousands of bills, or are some of the invoices likely to flow through unaudited because of workload or financial considerations?

Reputation. Seek out both clients and carriers that have done business with the provider and ask about their experiences. Don't limit your inquiries to the references suggested by the candidate.

Security. Information and systems must be fully protected from outsiders. Don't hesitate to bring your IT personnel into the discussions to ensure that all necessary protections are in place. Make sure the candidate has adequate provisions for the offsite storage of backup data and that its operations are Sarbanes-Oxley compliant.

Cost. While price shouldn't necessarily be last in importance, neither should it be the first and foremost consideration. In fact, cost should only come into play after you've ascertained that the candidates meet all of your other criteria. Beware of costs that are too low. Cash flow is important to the FBP company, and some may be tempted to quote unrealistic prices simply to gain the float. That can be a disaster waiting to happen. In the words of the late industry expert Bob Delaney, "You pay peanuts, you get monkeys."

About the Author

Clifford F. Lynch
Clifford F. Lynch is principal of C.F. Lynch & Associates, a provider of logistics management advisory services, and author of Logistics Outsourcing – A Management Guide and co-author of The Role of Transportation in the Supply Chain. He can be reached at cliff@cflynch.com.

More articles by Clifford F. Lynch

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